i've been in business for 14 years i have a portfolio of companies that last year did over $250 million in aggregate revenue and if I had to start over from scratch today this is the most important concept uh to learn right and so I want to be clear this is not a tactic it's not a funnel it's actually a ratio and once you understand it you'll never really see business the same way again and the way I like to think about this is that there's a lot of people out you know in the marketplace who talk about different methods but what this is is about a better model and the thing is is that methods expire methods are like onetrick ponies you figure out a new DM hack you figure out a new way to you know get your content to go viral with a new hashtag whatever right those are methods those are tiny tactics but those change all the time the things that endure are the models it's the economics of the business itself right and so that is the engine that fuels everything and so everyone likes to talk about marketing content branding etc but none of it matters if you run out of money and so let's think about the number one rule of business is don't go out of business and so what's the thing that prevents you from going out of business cash flow and so if you can manage your cash flow then you can basically stay in business forever you can continue to play the game in Silicon Valley they're able to do this by artificially inflating the cash they have in the business by raising money from the outside now the vast majority of businesses 99% of business owners don't have outside investors beyond themselves most businesses are bootstrapped and so if your cash is the only thing the business relies on you better well make sure that you build a business that makes cash flow so that you can stay in business and so what I'm going to walk you through is basically the concept that unlocked my business career so to illustrate the concept I'm going to kind of tell you the tale of two businesses and this tale is actually what I built you know my my wealth off of this idea so like I mean it made me a deculta millionaire so maybe worth paying attention to so when I entered the gym industry they were running things what they called LBOS's which is funny because in the in the M&A world LBO is a leverage buyout but in the gym owner world it was a low barrier offer right that's what it that's what it meant sometimes now people call it a low ticket offer but they would go they would run these $21 21-day programs right and this was like kind of like industry standard that's what everyone ran so you get 21 bucks for 21 days and then afterwards you try and convert them from $21 into a $99 per month membership right and this would take 21 days okay what we came in to start doing is we ran uh six-w week challenges and with our six week challenges we would get $600 upfront day one and then we would sell another $200 of supplements within the next 48 hours and then at week three we would get them to prepay for the year and so we would get another $2,000 now of course not every single person took every one of these upsells but blended we'd be looking somewhere in the neighborhood at a thousandish dollars within basically the first 30 days now look at the difference in economics between $21 in the first 30 days and $1,000 so if these two people or these two businesses are competing in the same marketplace which is an auction of attention quite literally when you're running ads who do you think can outspend whom this guy by a mile and so when we entered the space our gyms that ran our model not method our model didn't matter what advertising platform we were advertising on could outspend the competition handily so fundamentally the business that can make more money from its customer than its competitors wins and so because you make more money than your competitors off your customers then it means you can spend more to acquire them and if you can spend more then it means you have a veritable monopoly over the attention because think about every one of these eyeballs has a little auction that's going on in real time every day if I can outspend everybody in my market and I can actually have the ability to deliver on all of these customers guess what I can do i can buy up 100% of the advertising space and have a legal monopoly over that market because I can just outspend everybody now it's not like I have some network effect on pricing people out it has nothing to do with that if anything I make more money from customers so I can charge I can pay more to get them i'm not undercutting them and doing competitive practices it's the opposite i'm competing by having a better model and so these guys would lose money because for them it would still cost them about $100 to get a customer so you're like wait a second why would they pay $100 to make 21 this actually happens all the time in business and then they'd get one out of three of these people to buy the $99 thing and so it's really closer to $300 for them to get a $99 membership which on average would stay six months not a very good business but this is what the industry standard was but for us we're making a thousand plus and for us if we had $300 and it cost us less because our offer was actually better we were able to acquire and then continue to profit this whole period of time so if you have these two businesses if you're in business one do you have a marketing budget of course you do because you have to limit how much you're burning to get customers because you're losing money getting them so you have to say "Okay we're willing to spend you know $4,000 and we're going to get 40 people to buy our $21 thing that's what we're willing to spend." And we're going to wait until we get these people to add into our recurring revenue and then we might be able to spend $5,000 the next month but we have to budget it now in scenario two here what is our marketing budget for this business well if it cost you a hundred bucks to make a thousand what's your budget you spend as many dollars as you possibly can and keep those numbers that's how you do it and so this is what allowed me to bankroll the opening of each of my gym facilities when I had them beyond the first one and to open all of them at full capacity on the first day which is not common and so basically this is what it would look like i would put $5,000 into a bank account and I would sign a lease and then I would start running ads for $100 a day from those $100 a day of ads I would get 10 leads from those 10 leads I knew that I was going to close two of those leads from those two leads I knew that I was going to get let's call it $600 each so I was getting 1,200 bucks immediately from the $100 that I spent earlier that day now what's going to happen to my bank account well I was at 4,900 but now I have $1,200 more so now my 4,900 becomes 6,100 and I repeat the cycle again tomorrow now if I did this every day then I would make an extra call it $30,000 in profit month one but I was a sneaky sneaky guy and so instead of spending $100 I would spend $500 every day and then with that money there was some inefficiencies that happened sometimes lead costs went up etc but I would usually be able to generate upwards of $100,000 in sales within that period of time from one gym and so with that $100,000 guess what it cost to open a gym a little bit less than $100,000 and so I was able to finance the opening of each of my gyms by putting $5,000 into the bank account running through this black box and then getting $100,000 on the other side in that first month and so that then allowed me to buy the equipment it did the flooring i bought the sign i did the painting i put the lobby in place i got my weights i got everything I needed the sound system right merch all that stuff set up so that at the end of the 30 days of the pre-sale I could then kick the gym off completely outfitted completely paid for by the customers that now started and then 6 weeks after that we would roll those customers into a recurring membership and then at that point 6 weeks later the business was cash flow positive and this is how when I was in my very early 20s I was able to open up six locations off of the cash flow that the business was able to generate and in such a short period of time and so the thing is is that every single business can build a box like this with skill so coming back to the number one most important business concept this is what you need to know number one is what what's a customer worth to you over 30 days now the reason I limit it to 30 days is because that's typically as long as most small businesses can handle from a cash flow perspective as in like you're willing to pay money wait 30 days to get it back that's also because that's the the interestfree time period where people will give you money for no interest credit cards are interest free for the first 30 days and so you basically are limited by your ability to get credit if you actually had no money but if you do have some money then still you want to recover it back within the first 30 days that's a rule of thumb now the second thing is okay we know what a customer is worth to us we know what gross profit how much we're going to make from them after we pay the cost of delivering whatever it is that we sell the next is what's a customer cost me now what I'm going be clear here is I'm not talking about cost me to deliver i'm saying what does it cost me to get them so what do I have to spend in marketing in advertising in content in sales commissions to get a customer in the door and you have to know these two numbers number one and number two and ideally number one is greater than number two right like we want to make sure we're making more money from customers than it costs us to make it and the thing is is if you don't understand your business math you'll continue to blame other things right you'll continue to blame your methods oh Facebook doesn't work for me oh outbound doesn't work for me content doesn't work for me well imagine you're in this scenario right is it actually an issue with Facebook ads is is it the ads that aren't working is it the method that's not working or is it the model you have a model issue if you could make hypothetically a billion dollars from a customer you could spend 12 cents to reach every single person on Earth and just try to get one customer that would be a business that could probably spend a lot of money real quick I have a gift for you this is the $und00 million scaling roadmap it's something that my team and I put 200 plus hours into building and breaking the stages of scaling into 10 steps all right and so what we did is we broke down everything that got us basically got us stuck and what we did to break free at each level of the business and if you'd like to know what product marketing sales customer service IT recruiting human uh resources and finance look like at the stage that you're currently at this is a free gift so all you have to do is go to aquis.com/roadmap you can plug in your business information and if you want our help you want my help to help you break through whatever level of scaling you're at this is not a promise i'm just saying I'd love to help um on the thank you page you can book a call uh every month we have a workshop out here at my headquarters you actually talk to my real team that does does our marketing does our emails does our ads does our copy does our does our does our sales does our finance does our recruiting the real people are doing this at a very high level and what's really cool about that is that they can typically find and spot what the constraints are in a business like that and so it's one of the most valuable things that I could possibly do obviously you know space is limited based on our actual headquarters um but if that's interesting on the thank you page you can book a call no pressure this is a gift either way it's absolutely free now I've been I've been I've been hiding the the the real words for this but thankfully business actually has a term for this which is the lifetime gross profit which is LTGP sometimes people refer to this as LTV or CLV customer lifetime value lifetime value all of these more or less mean the same thing what's the amount of money you make after you spend whatever you got to spend in delivering for the customer what's the extra cash on top if you they pay you 100 bucks it cost you 20 to deliver a sandwich 80 bucks is your gross profit if they do that 10 times $800 is the lifetime gross profit all right now what's a customer cost me this is CAC this is cost of acquiring customer that's what that stands for all right so this is our ratio of LTV to CAC here we go now if you can do this math for yourself and I'll give you the back and napkin way of looking at this because you're probably like I don't track this stuff and that's okay look at what you spent in marketing for all of last year okay so do a whole year very simple you can just look at the line item what you spend in advertising what you spend in labor that's associated with it so you might have a videographer or a contractor you might have spent some money on ads you might have spent some money in commissions everything that it takes to cost to get a customer okay all of those cost you add them together and then you look at how many new customers did I get last year maybe you got a 100 customers and let's say it cost you $100,000 okay so that means it cost you $1,000 per customer okay this should make sense that gives you how much your CAC is and the nice thing is that CAC's the easiest one to calculate you just literally look at your cost divided by customers that's it i'll give you the back of napkin simplest way to do it which is revenue divided by number of total customers now I want to be clear this is going to give us our lifetime revenue we still have to look at our gross profit here so we would just multiply that number by gross profits and if you're not sure what your gross profits are if it cost you 20 bucks to make a sandwich and you charge a h 100 bucks then your gross profit is 80 meaning 80% all right so you'd multiply that number by 80% and that's what your lifetime gross profit's going to be so I'll also give you the simplest way to do gross profit so I'm giving you the back and napkin quick and dirty ways but you know what's interesting that I found is that the back of napkin way when you do it over an extended period of time tends to be the most accurate because it takes you don't have these good months and bad months it actually gives you a more accurate picture of your business all right so the way you do it is you look at uh total costs of goods which some people call COGS all right or cost of delivery if you have a service so it's like if you have a bunch of reps and you have some software that you use to deliver or you've got some contractors that you deliver some stuff whatever it costs you to deliver for all customers for the whole year divided by number of customers that's it so that'll give you what your cost per customer is and so if we then take our lifetime revenue and subtract our cost per customer then we'll get our lifetime value all right which is the gross profit per customer and that's like a very real way of doing that so we have you know two variables simple divisions with some simple subtraction all right so this is not intimidating math and if this intimidates you I would encourage you to get over it because this is this is this is not even this is third grade math i don't know when they teach multiplication division but I think it's around third grade all right it's not a lot okay like you can do this like literally all you have to do is just add up just add up the line item at the end of your bookkeeping because your bookkeeper probably does this just look at your advertising total look at your sales commission total look at your your payroll total for everything else that's not marketing and salesreated and then you add all that stuff up together and you look at how many customers you have in total that are active and then you divide it and so the end result here is that you're going to have an LTV number or lifetime gross profit number whatever it is and you're going to have a CAC number on average for the last year now ideally you want the ratio between these numbers to be as big as possible now I'm going to give you three kind of considerations for this many of the people in the software world the very smart Silicon Valley people talk about a rule of th one which is you want to make sure that you're making at least $3 in gross profit per customer for every dollar it cost to get them okay now having done business for a while now that is only true under the conditions where you have all three elements of business that are automated and you're like what are the what are the components of business basically lead generation has to be automated conversion has to be automated so sales how you going to get people to to to give you money right and then you have delivery or fulfillment these are the three components that have to be automated if all three are automated yes 3:1 works now if two of the three are automated right so let's say this one isn't automated this one is and this one is then I think you change that to about six to one now if two of them are not automated and only one of them is I think you change that to nine to one that's at minimum and then finally if all three are not automated meaning you have people at every one of these steps in the process you need to be at over 12 to one now you might be like wow that's a lot different than what I have right and that's why we need to improve it which is what I'm going to talk about next now you might hear this and then wonder like wait what degree is does this like the checks and the X's what does that even mean okay so lead genen something that's high leverage would be like making content that's one to many running ads one to many those are things that would qualify to me as being high leverage it's not one person you don't have manual labor that's really installed there in order you're not limited by human now if you're doing manual outreach in order to get customers you would be limited there right if you have viral coefficient it's all word of mouth and it's compounding that has high leverage right so if you were doing outreach as your primary way of getting customers well there's nothing wrong with doing that to be clear but if you do a manual process then you're going to have an X here so it's going to mean you're gonna have to increase your LTV to CAC ratio now if you're like why do I have to do this the reason that this ratio has to increase is because there's a number of costs that the business incurs as you scale so number one is the cost of getting new customers is actually going to go up as you go to colder and colder markets cost of getting customer believe it or not always goes up over time so you might whatever you have today believe it or not is likely going to be the best cost per car customer you're ever going to get all right because CPMs go up over time this is a fact of life more competitors enter the marketplace this is a fact of life and even if neither of those things are true and you just went into colder and colder markets as in you scaled up your advertising you're going to reach people that the algorithm thinks are slightly less likely than the first people that they displayed your ads to which means it's going to cost more because it's going to have to show it to more eyeballs to get the same number of conversions so it's going to cost you more per customer you're going up the interest graph right you're going up kind of the normal curve of people are less and less interested as you go colder and colder and spend more and more that's number one the second reason that this is important is that you're going to put in layers of infrastructure in your business you're going to have levels of management and these things although they suck still add cost to business as it scales and so you're going to need some padding in terms of your lifetime gross profit to be able to afford this level of scaling and typically customers that come in later are less sold on the idea and sometimes are worth less so they actually end up spending less money over time and so all of these reasons kind of compound together and the last one which is so important when it comes to this X mark is that when you have people in every one of these processes whenever you hit a point of kind of saturation you've hit the capacity of let's say your sales team let's say you've got five guys that are proficient they do well well at some point you're going to have to scale your sales and so you're going to bring a sixth person in or seventh person in but that new sales guy is not going to be as good as the first five it's going to take time for them to get good for them to get on same thing when it comes to marketing you're going to have to have a new marketer who's going to come he's not going to be as good at making content he's going to have to get reps same thing on delivery you might have some star account reps on the back end that do some level of of service delivery and you have to bring somebody else up to speed but the thing is is the business has to incur that cost immediately day one and doesn't always get the return on that for a few months and so if you're at 3:1 and then you have these all of a sudden imagine this you're at 3:1 but then you have to bring in a new marketer you have to bring in new sales people and you have to bring in new account reps well all of your metrics are going to suffer which means all of a sudden you're going to go from barely being profitable to probably not being profitable at all and so we have to have this these increases for each level of manual that enters the business in terms of manual labor so that we have padding and cushion for cash flow in order to scale because the number one rule of business is you have to you can stay in business as long as you got money that's the rule and so we have to make sure our economics of the business support the fact that we're going to have inefficiencies as we scale and it's going to be lumpy right right we have to bring in a whole bunch of new sales guys our conversion rates are going to tank but we have to have the business economics the model to support that because if the only way your business works is that you're selling you're never going to scale you have to fix the model i could make 20 books and movies on on on what you do to increase this ratio how do you improve it all right so off the off the top of my head all right some things that you can do to immediately make more money number one is you can raise the price number two is that you can decrease costs number three is that you can have upsells number four is that you can add downells which means that a higher percentage of customers who otherwise wouldn't have bought now do so you actually make more money per because you actually sell more people if you start selling uh expensive people who would have bought an expensive thing a cheap thing you make less money so you got to be very careful with downells um you can add in financing all right this is something that pulls cash forward again this is from a cash flow perspective you can change the terms of how you collect payment you can say you know what you can have a payment plan and you can pay as long as you want but we don't start working until you pay off everything right there are different ways that we can structure these things that we can frontload the cash in the business you can also have cross- sales which means that you sell them something different rather than higher quality or more of something you actually sell something different you sell a burger with fries rather than a bigger burger or a better burger right and as I'm going through these things you should absolutely know how to be able to apply this to any business all right so if I have let's say we'll take let's take take this book all right so if I wanted to run through this I could raise the price of my book i could buy in larger economies of scale to decrease the cost of the book or I could figure out what I could do from a shipping perspective to negotiate better rates on my shipping um I could have maybe AI support so that I don't have to have as many people to manage kind of shipping issues i could upsell a nicer version of this book so instead of being a digital book I could upsell a hard version of this book or I could give you audio and a hard copy and ebook version of this book if I wanted to cross-ell I would sell a second book that was different than the original book if I needed financing which for the you hope that people don't need financing for a book but I could introduce financing so that people could pay for this book up front and so all of these different and if I have a the downell here is the reverse of the upsell if people can't afford my hardback then I say why don't you have one of my digital copies which is cheaper all right and so every business you should be able to on the top of your head think of ways to apply this i'm going to do this again because I think it's worth doing all right what is this this is a table all right so I can increase the price of my table i can decrease the cost of of manufacturing this table i can upsell a higher quality table so I can say "Hey let's make this marble right or I can downell a wood or plastic version i can cross-ell chairs or table covers that go with this thing i can add a warranty on top of this that I can upsell or cross-ell excuse me um I can add financing or I can change the terms of collection all of these things are things that can drive up the lifetime value and if you can't go through that exercise with your business you don't understand your business well enough you could absolutely do this with any business it's actually harder with physical products than it is with services now of course what every business owner wants is they want cheaper customers because no one ever wants to admit that their business isn't that good and the reality is most business owners want more leads and it's usually the last thing they really need they really need a better model so they can afford more expensive leads and that gives you a competitive advantage you wanting cheaper leads means that you're competing on methods and that means that somebody else can copy your methods and if they have a better model they'll still outspend you and so the model is the competitive mode a method is a one trick right and that will expire so you want to always double down on the model and obviously you want to know what's up to date right now hey if you can get customers for cheaper let's do it but the long-term thing is you want to make sure you have a better model now how do you decrease the cost of getting customers all right so you can improve your offer right how do we how do we make the thing that we have more compelling we can improve our ad creatives so this is uh better ads so think about this in terms of volume and quality how do I put out more ads how do I have better hooks how do I remake my winners we can also increase CRO so conversion rate optimization in terms of uh our pages so are we split testing our pages split testing our follow-up are we split testing uh the scripting that we're using on the phone are we training our team if we use phone sales all of these things uh decrease your CAC on top of this we can go to um I'll just say cheaper CPMs which is you're going to advertise in places that cost you less per eyeball now again lowering CAC is not necessarily the answer you can lower CAC but that assumes that you're and again CAC can not cost per lead because you can get very cheap leads very easily but you not might not get good leads you might not get customers if you do that and so we really just want to maximize for our return between these two numbers so I'll give you a hypothetical example let's say uh in scenario one actually I'm going to give a fresh page here so let's say scenario one LTV is $5,000 and CAC is $500 and let's say scenario two LTV is $1,000 and CAC is $200 which business would you rather have well if you just said "Hey I want cheaper customers." Then you'd say this "But does that make sense?" No because you're getting five to one wouldn't you rather put $500 in and get $5,000 back because now you're getting 10 to one and so obviously this business number one is the better business to own even though it costs you more than twice as much to get a customer and so we want to optimize for our returns not for one specific number of I want the cheapest leads or I want the cheapest customers you want the customers that are worth the most relative to what you pay this concept if you actually can internalize this and actually choose to make decisions about your business like this because I'm telling you right now most business owners optimize for this they say "Oh we're getting this is getting us cheaper customers let's advertise broader let's make sure that we open up the top of the funnel." Well guess what you're going to get way more and you're going to get way more trash and then all of a sudden you're like "Man all these customers suck." Well it's because you're not you're not willing to spend more to get a better quality customer the thing is is the higher the customer is typically the more expanded this LTV to CAC ratio gets so wouldn't you be willing to spend a million dollars to get a customer that pays you 20 million yes and sometimes that's what it is it costs a ton of money but then you make so much more but you've got to be willing to pay to play so this is how real business works everything in business changes once you understand this all you have to do to stay in business is you have to have cash and in order to have cash you need to increase what you make versus what you spend to make it and managing that ratio and the payback period of when you get that money back is going to be the lever on how quickly you can grow and reinvest the money back into your money-making machine so if you can spend more to get customers than your competitors can you win and this is what I wish someone had told me or got me to explain year one and so hopefully now you know